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Conflict Minerals Rule: Year 1 Reporting Trends

In light of the legal developments in April and May 2014 leading up to the first filing deadline of the Securities and Exchange Commission’s conflict minerals reporting requirements, Deloitte & Touche LLP provides observations and insights for registrants to consider related to Year 1 reporting trends, as well as recommendations for registrants as they seek to enhance their conflict minerals due diligence processes and reporting practices for Year 2.

A recent issue of Deloitte & Touche LLP’s Heads Up newsletter discusses findings from an analysis of registrants’ Year 1 filings under the SEC’s final rule on conflict minerals.

Overview

With legal action against the SEC regarding the constitutionality of certain disclosures under its final rule on conflict minerals still partially unresolved, more than 1,300 registrants submitted their first conflict minerals filing in early June. The SEC estimated that approximately 6,000 registrants would be affected by the rule; however, a significantly lower number filed a Specialized Disclosure Form (Form SD) indicating whether conflict minerals (tin, tantalum, tungsten or gold—commonly referred to as 3TG) necessary to the functionality or production of their products manufactured or contracted to be manufactured may have originated in the Democratic Republic of Congo (DRC) or an adjoining country.

Editor’s Note: In August 2012, the SEC approved its final rule on conflict minerals, as required under Section 1502 of the Dodd-Frank Act.¹ The rule requires certain registrants to follow a three-step process for evaluating conflict minerals contained in their products and to file a Form SD by May 31, 2014, for the 2013 calendar year, and annually by May 31 thereafter, describing their process for conducting a reasonable country of origin inquiry (RCOI). In certain circumstances, the registrant is required to include a Conflict Minerals Report (CMR) describing its due diligence measures and, for certain of those situations, to have an independent private sector audit (IPSA) performed in accordance with generally accepted government auditing standards (GAGAS).

A legal action regarding the final rule was brought against the SEC in October 2012 and has been working its way through the courts since that time. In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit held that parts of the rule and of Section 1502 of the Dodd-Frank Act violate the First Amendment to the extent that they require “regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”‘“ The SEC issued guidance indicating that registrants were still expected to file Form SD and, if applicable, a CMR required by the rule on or before the due date. However, registrants would not be required to identify any products as “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” Registrants could still elect to identify products as “DRC conflict free” but they would be required to obtain an IPSA. On June 2, 2014, the SEC petitioned the U.S. Court of Appeals for the D.C. Circuit for another judicial hearing to settle the lingering question of whether certain conflict minerals disclosures are constitutional.

Trends Emerging From a Recent Analysis of Year 1 Filings

Following are some of the trends noted from the analysis:

—The majority of filings (approximately 54%) were from registrants in the C&IP industry² (e.g., aerospace, automotive, retail and consumer products) followed by the TMT industry (approximately 30%).

—Of the 1,300+ filings, nearly 80% of Form SD filings included a CMR.

—The executive signatory of the Form SD was most commonly a financial executive (e.g., CFO), followed by a legal executive (e.g., general counsel).

—Although product labels were not required because of the constitutional challenge, many registrants indicated “undeterminable” with respect to their products manufactured or contracted to be manufactured—either by explicitly stating “DRC conflict undeterminable” or by stating that they were not certain of the source of the minerals.

—Approximately 25% of registrants disclosed a smelter or refiner list.

—Approximately 55% listed additional due diligence measures they plan to take in the future to improve the visibility of their sourcing practices.

—Four registrants obtained an IPSA: two were attestation engagements (performed by CPA firms), and two were performance audits (performed by non-CPA firms).

—Approximately nine registrants amended their filings to include additional details or to make other administrative updates (e.g., date changes).

The Heads Up newsletter on conflict minerals rule reporting trends also discusses a series of observations, including trends in reporting by industry, executive signatory, Year 1 approaches to Form SD and the CMR, as well as leading practices, due diligence measures disclosed, IPSA readiness and risk mitigation/future due diligence measures. For more information on the Year 1 conflict minerals reporting trends see the full issue of Heads Up.

Endnotes1. Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directs the SEC to issue rules requiring certain registrants to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those registrants. Section 1502 amends the Securities and Exchange Act of 1934 to add subsection 13(p).2. Industry designations are based on Deloitte’s industry categorizations as follows: consumer and industrial products (C&IP); technology, media, and telecommunications (TMT); energy and resources (E&R); life sciences and health care (LS&HC); and financial services (FS). For registrants that are conglomerates operating in many industries, we used the industry of the business unit/segment that resulted in the registrant’s inclusion in the scope of the final rule.

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